The PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech-heavy Nasdaq-100 Index, is up about 9% year-to-date. Impressively, the popular exchange traded fund has reclaimed most of its losses after falling earlier this month, but predicting what’s next for QQQ is difficult.
Stocks such as Apple (NASDAQ: AAPL), Google parent Alphabet Inc. (NASDAQ: GOOG), Facebook Inc. (NASDAQ: FB) and Microsoft Corp. (NASDAQ: MSFT) are pivotal to QQQ’s performance. That quartet combines for over 35% of QQQ’s roster.
“It was during intraday action on Friday, Feb. 9 — the day of the aforementioned QQQ trough — that the tech-based exchange-traded fund (ETF) briefly broke through both of these moving averages before snapping back to end the session higher,” reports Schaeffer’s Investment Research. “But it was actually earlier that week that QQQ fell to within one standard deviation of each moving average — on Feb. 6 for the 126-day, and Feb. 8 for the 160-day, according to Schaeffer’s Senior Quantitative Analyst Rocky White. And on previous occasions where QQQ has pulled back to each of these moving averages after a lengthy stretch above it (defined as 80% of the time over at least two months, for our purposes), the fund’s returns going forward have been a mixed bag.”
With technology’s ascent and that of QQQ, come concerns that the Nasdaq-100 is too heavily exposed to a small number of stocks. Additionally, some analysts opine that the benchmark’s significant technology overweight leaves it vulnerable should tech stocks fall out of favor. Due to tech’s ascent this year, QQQ’s exposure to the sector has increased while its consumer discretionary weight has been mostly steady.
After surging 37% last year, technology remains a favorite among investors, despite data suggesting technology stocks are relatively expensive as they trade at elevated price-to-earnings compared to the broader S&P 500. Roughly a third of global fund managers say they are overweight tech in their portfolios, according to a recent Bank of America Merrill Lynch survey.
Regarding QQQ, “in the past three years, there have been seven of these pullback signals involving the 126-day. The average one-week return following these occurrences is 0.77%, but the average one-month return is a 1.10% drop, with only 50% of returns positive over this time frame. The one-month return following the Feb. 6 signal is still an open question, but the one-week return was notably weaker than average — a loss of 1.61%,” according to Schaeffer’s.
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Tom Lydon’s clients own shares of QQQ, Apple, Facebook and Microsoft.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.